At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network. That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network – moreso than the widely reported price volatility and hacker attacks.

"They've been the single biggest factor for stomping out currency competition," says Bradley Jansen, a former assistant to Rep. Ron Paul and director of the Center for Financial Privacy and Human Rights. Speaking recently on The Daily Bitcoin podcast with Adam Levine, Jansen expressed surprise at how little focus bitcoin business leaders are putting on Fincen, especially considering how regulators thwarted earlier emerging payment systems like PayPal and e-gold. PayPal obviously survived and prospered – but only after selling itself to eBay and agreeing to put restrictions on its service. E-gold was not so fortunate.

"Fincen was able to stop currency competition with technical innovations in the 90s even before their expanded powers under the U.S. Patriot Act. And, what we've got now is a Fincen on steroids without clear restrictions from Congress," Jansen says.

The guidance requires certain intermediaries that handle virtual currency to register with Fincen as money services businesses, which entails recordkeeping and reporting responsibilities. And it says some of those businesses may additionally be money transmitters, which would mean fingerprinting of directors and officers and compliance with a patchwork of state licensing requirements.

Jansen postulates that the recent Fincen virtual currency guidance was issued ex post facto as a way to set the stage for potential prosecutions in the future.

"It's a failure of Congress to do its job. We knew that these guidelines and these prosecutions were in the works even last Congress. Ron Paul was the chairman of the House subcommittee that had jurisdiction over Fincen and he never had a single hearing on this."

In a recent speech, Fincen Director Jennifer Shasky Calvery said the new guidance aims "to protect [digitial currency] systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors." She reiterated that the guidance does not apply to everyday users who pay or accept bitcoin for goods and services.

But by saddling startups with compliance requirements, and making them unattractive clients for regulated banks that despair of serving MSBs, Fincen is choking these businesses that facilitate conversion of bitcoins into dollars. Fewer exchanges and more red tape will make it harder for merchants or consumers (who, after all, must still pay the bills with dollars) to take advantage of the Bitcoin payment system’s speed, privacy and competitive costs.

On March 20 – just two days after the guidance from Fincen came out – the bitcoin exchanger bitme.com suspended operations indefinitely. Bitme was a relatively small operation, but it was widely suspected among bitcoin users in online forums that this closure resulted from difficulties related to potential regulatory compliance.

BTC Buy, another bitcoin exchange site, suspended services and closed permanently in early April, specifically citing the legal uncertainty brought up by the Fincen guidance.

Most recently, the largest bitcoin exchange to halt trading was Bitfloor, run by Roman Shtylman, who blamed "circumstances outside of our control." His New York operation had average daily trading volume of about $300,000 (depending on the exchange rate), with U.S. dollar deposits and withdrawals running through a Capital One bank account – which the bank unilaterally closed. "I had very little time to act between receiving the account closure letter and the account being closed," Shtylman told PaymentsSource.

In this case, the regulatory guidance may have had an indirect effect. Bitfloor was registered with Fincen as an MSB but was not licensed as a state money transmitter. Shtylman surmised that Capital One had judged his business to be "not worth the risk."

Across the Atlantic and presumably unrelated to Fincen, Poland-based Bitcoin-24 suspended trading after the government there froze its bank account. It reportedly did so because a bank in Germany complained of compromised accounts transferring stolen money without identification to Bitcoin-24. Also, U.K.-based TransferWise, a foreign currency intermediary, ceased transfers to any bitcoin exchanges at the request of its banking partners. TransferWise had mostly been servicing customers in the U.K., Poland, and Spain.

It will be interesting to watch how Fincen intends to treat one-way, fixed-rate brokers that either buy or sell bitcoin at a fixed price. Since a two-way exchange market is not involved it could be seen as merely a typical commodity purchase or sale.

Tangible Cryptography LLC, which registered as an MSB this month, operates FastCash4Bitcoins for selling bitcoins and Bitcoins Direct for private off-exchange purchases. The two businesses function independently of each other and neither is technically an exchange. Bitcoins Direct is frequently closed to new clients and its cash deposit feature was recently cancelled.

The fact that bitcoin survives at all with so many powerful forces lined up against it is a testament to its resiliency and tenacity. Now, in addition to the vicious press coverage and persistent denial of service attacks on exchanges, the emerging cryptographic money has to contend with onerous and targeted regulation.

With respect to bitcoin and financial regulation, Jansen warns: "I think the lesson from the 90s was that you either become what Fincen wants you to be or you're not going to be."

Not in the U.S., that is. But jurisdictional competition will kick in and overseas exchanges will gain market share and liquidity. They just may not have U.S. customers.

Jon Matonis is an e-money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior posts at Sumitomo Bank, Visa, VeriSign, and Hushmail. Currently, he serves on the board of the Bitcoin Foundation. Follow him on Twitter @jonmatonis.

JOIN THE DISCUSSION

SEE MORE IN

RELATED TAGS

@Milly Bitcoin My argument is that laws which violate the first amendment are unconstitutional and thus unenforceable. The distinction between electronic distribution and paper distribution is semantic I realize, but in the Zimmerman case it showed that PGP was closer to a book than a weapon. In the case of Bitcoin it will demonstrate that, as a currency which consists strictly of information, it is closer to a political pamphlet than a swiss bank account.

Posted by AnneArquiste | Monday, April 29 2013 at 11:09AM ET

@AnneArquiste Just because an activity is protected by the First Amendment does not give you a license to ignore other laws. I don't see how printing on paper vs. electronic delivery makes any difference.

Posted by Milly Bitcoin | Sunday, April 28 2013 at 8:59PM ET

I fully support bitcoin, but I understand that with the emergence of any new currency, existing regulations must be applied as well to ensure stability and consumer protections, especially when handling it in a manner that most bitcoin exchanges do. With the recent DDOS attacks on mt.Gox and various issues with other exchanges, it's apparent that as much as we want bitcoin to succeed as an alternative commodity, the infrastructure for it has to mature greatly before it's taken seriously. When hackers can cause the value to plummet by more than 50% in a single day, you know that bitcoin is still in it's infancy. The best we can do is refer new users to the tremendously helpful forums at http://bitcointalk.org and direct them to business directories like http://www.bitcoincheddar.com that let them know that as a currency, it's gaining traction both in the online medium and offline. I expect with Los Angeles' coming bitcoin ATMs, things are going to look up for BTC in the near future.

Posted by BTCC | Friday, April 26 2013 at 12:43AM ET

I am a local bitcoin seller, and I have adapted my business in the following way to compensate for the recent FinCEN guidance: I now only sell preloaded paper wallets, I believe this activity is protected by the First Amendment. When Phil Zimmerman put the PGP source code in literary form, the US government could no longer regulate it's trade because it is protected free speech.

Posted by AnneArquiste | Thursday, April 25 2013 at 9:23PM ET

"Not in the U.S., that is. But jurisdictional competition will kick in and overseas exchanges will gain market share and liquidity. They just may not have U.S. customers."

If this is how it works out, it is going to be bad news for the U.S. economy. Imagine what would have happened if the internet was strangled in the U.S. in the 90s by overregulation, but still flourished in Europe and the rest of the world. Bitcoin has the potential to transform commerce, but maybe just not here.

Expect banks to pull back on energy lending in the near term, as regulators step up their scrutiny of oil loans and bankers approach the business with a "different attitude," says Mariner Kemper, chairman and chief executive at UMB Financial in Kansas City, Mo.

The post-election rise in stock prices has been a boon for investors, but it is also causing notable changes for financial institutions. Here are a number of ways that the rally can help  and hurt  the banking industry.

It's the time of year to give thanks, and for bankers some things to be grateful for include rising stock prices, a brightening M&A outlook and, most notably, the potential for regulatory relief under President-elect Donald Trump. Here is a list of developments the industry might be celebrating this Thanksgiving holiday.

Bankers are anxiously waiting to see who President-elect Donald Trump will pick as the next Treasury secretary. Several prominent names have been floated for the job, though with every passing day, a new possible choice seems to pop up. Following is a look at the current crop of candidates and their chances.

Mobile phones are only going to become a bigger part of how banks interact with their customers, so several institutions are looking to enhance that experience. They are focusing on better ways of opening accounts, verifying identities, interacting with customers and offering new services and features. Here are some of the improvements announced this year.

This year federal and state regulators have started to pay closer attention to the rapidly evolving online-lending sector  particularly online small-business lending. What follows is a look at eight key players in the debate over how to regulate this emerging industry.